Should U.S. Olympians be Exempt from Paying Taxes on Medals and Prize Money?

Senator Marco Rubio from the State of Florida proposed a bill to the United States Senate in favor of exempting U.S. Olympic medalists from paying Federal taxes on their medals and prize money. The current U.S. tax code holds that the value of Olympic medals and prize money must be added to the Olympian’s taxable income. The medals and prize money are then taxed at a rate of 35% by the IRS.

According to Americans for Tax Reform, a gold medal is valued at approximately $675, resulting in a tax of $236. In addition to earning a medal, Olympic medalists also receive cash prizes of $25,000 for earning a gold medal, $15,000 for earning a silver medal, and $10,000 for earning a bronze medal. This would mean that an Olympian who earned the gold medal would pay $8,750 in Federal taxes. An Olympian who earned a silver medal would pay $5,250 in Federal taxes. Lastly, an Olympian who earned a bronze medal would pay $3,500 in Federal taxes.  

Senator Rubio’s bill proposes to eliminate the tax on Olympic medals and prize money won by athletes representing the United States in the Olympics. However, there is a hint of unfairness to this bill because there are several other tax codes that should also be eliminated or revised if this bill becomes a law. For example, should individuals receiving monetary gifts exceeding $13,000 be taxed on the gift? After all aren’t gifts supposed to be free? And if someone is blessed to have someone leave them a large estate as an inheritance, should they be taxed to receive it? Should athletes be taxed on the endorsement money they receive simply because a company desired to have them be the spokesperson for their product? Should lotto winners and gamblers pay taxes on the money they won as a result of luck? Should U.S. Citizens earning income abroad be taxed on that income?

When one chooses a career path,  one must be willing to accept the tax consequences that follow. For example, a doctor who saves hundreds or perhaps even thousands of lives is not exempt from Federal taxation. A teacher who is responsible for educating our political leaders is not exempt from Federal taxation. An Amateur or a Professional Gambler is not exempt from Federal taxation. Not even the President of the United States who is responsible for running the United States is exempt from Federal taxation.

So what makes Olympic athletes any different? Surely the athletes are not solely interested in representing their country just for the bragging rights, there has to be some financial motivation behind it. And should an athlete come forward and deny the financial motivation behind making the Olympic team and winning a medal, then that athlete should not be distraught by the tax consequences that result from winning a medal.

Now I will agree that the tax on the medal should be removed because even if the Medal is made of real gold, silver, or bronze, it should not be taxable unless sold by the Olympian for cash value. However, the tax on the prize money should not be eliminated because their job is essentially to be an athlete, and any income earned because of their athletic ability should be taxed.

There are men and women who have devoted their lives to representing our country, and the only portion of their income that is exempt is when they are sent to a combat zone. These men and women deserve to have their full income exempt because they are risking their lives to protect the lives of others. However, no amount of money can compensate for the risk associated with working in a combat zone. Although being an athlete in the Olympics is similar to being in a combat zone because of the battle amongst nations to prove whose athletes are the best, the athletes are not risking their lives to protect the lives of others.

I am very proud of our Olympians, but an Olympian winning a medal only incites country pride and the occasional bragging rights. It does not equate and should not be equated to the safety and peace of mind that the men and women in our military provide. As a result, any prize money earned by an athlete, whether it is earned from participating in the Olympics or not, should be taxed. Taxation is the consequence of earning income both in the United States and abroad, and Olympic athletes should not be exempt.

Republican Tax Cut Versus Democratic Tax Cut

The current stimulus established by the Bush Administration is set to expire on January 1, 2013. Under the current stimulus plan, the eligibility threshold was reduced to $3,000 in earned income for the child tax credit. It also increased the earned income credit for families consisting of three or more children. The marriage penalty was reduced through the higher level of earned income credit phase-out for married taxpayers. It also increased the middleclass tax deduction for tuition, and doubled the length of eligibility from two years to four years. Also, the first $1,000 of the tuition credit was refundable in an effort to offset higher education costs. Congress must now determine which proposed plan by either the Republicans or the Democrats concerning tax cuts should be allowed.

The Republican plan proposed by Senator Orrin G. Hatch of Utah, proposes to end the tax cuts established by the Bush Administration. The Republican plan would result in an expiration of tax breaks for 13 million low income taxpayers, while extending tax cuts to approximately 2.7 million of the upper class taxpayers. It would also result in a reduction of refunds for approximately thirteen million families, while some would incur an increase in taxation.

The Democratic plan favors extending the tax cuts established by the Bush Administration to 2013 as it would benefit middle class families. Under the Democratic plan, earnings of over $250,000 would be taxed at about 36 percent and 39.6 percent instead of the current 33 percent and 35 percent established by the Bush Administration. The estate tax rate would also be increased to 55 percent on inheritances over $1 million for individual taxpayers and $2 million for married taxpayers, instead of the 35 percent currently paid by estates valuing over $5 million for individual taxpayers, and $10 million for married taxpayers.

The Democratic plan would raise approximately $82 billion more in taxes in 2013 than the Republican plan. However, according to Congress’s Joint Committee on Taxation, a permanent extension of all tax cuts established by the Bush Administration would reduce taxes for households earning more than $1 million annually by approximately $74,500 in 2013, while the Democratic proposal would reduce taxes for those same households by approximately $7,000.

Republicans support ending the tax cuts established by the Bush Administration because it favors the working poor who currently receive approximately $3 in government benefits for every $1 they earn, while the middle 20 percent receives more in government refunds that they actually paid in taxes. Republicans also argue that the working poor have already received increases in government aids such as food stamps and unemployment benefits. As a result, Republicans argue that it makes sense to let this tax cut lapse, as it was not meant to be permanent but was meant to be temporary assistance to help boost the economy.

Which plan would you choose?

The State of our Nation: The Dirty Dozen Tax Scams of 2012

The State of our Nation: The Dirty Dozen Tax Scams of 2012: Every year, the Internal Revenue Service ("IRS") releases the most common tax scams for that tax year. Here are the Dirty Dozen Tax Scams of...

The Dirty Dozen Tax Scams of 2012

Every year, the Internal Revenue Service ("IRS") releases the most common tax scams for that tax year. Here are the Dirty Dozen Tax Scams of 2012 as reported by the IRS: (1) Identity Theft, (2) Phishing, (3) Return Preparer Fraud, (4) Hiding Income Offshore, (5) "Free Money" from the IRS & Tax Scams Involving Social Security, (6) False/Inflated Income and Expenses, (7) False Form 1099 Refund Claims, (7) Frivolous Arguments, (8) Falsely Claiming Zero Wages, (9) Abuse of Charitable Organizations and Deductions, (10) Disguised Corporate Ownership, and (12) Misuse of Trusts.

Identity Theft
     It is no surprise that Identity theft is number one on the list. In identity theft cases, the thief seeks ways to use a legitimate taxpayer's identity and personal information in order to file what appears to be a legitimate income tax return, in order to claim a fraudulent refund. The IRS detects this type of fraud when more than one income tax return was filed on behalf of the same taxpayer, or received wages from an unknown employer. When this event occurs, the IRS will send correspondence to the individual in order to notify them of the potential fraud or identity theft. It has also been found that this type of event occurs commonly for spouses filing separate returns. One spouse may file a joint return without the consent of the other spouse, while the unaware spouse files a separate return that does not include their spouse. If you believe that you have been a victim of identity theft, you may visit the IRS page for identity theft at:  www.IRS.gov/identitytheft.

Phishing
     Phishing is commonly achieved through the use of unsolicited email or a fake website that aims to acquire personal and financial information from individuals. Individuals may also receive fraudulent emails that may appear to be from the IRS or one of its affiliate organizations. It is important to know that the IRS does not communicate with taxpayers via email, text messages, or through social media channels. If you receive any such communication, you may report it to the IRS by sending a report to:  phishing@irs.gov.

Return Preparer Fraud
     Most taxpayers use tax professionals in order to have their income tax return prepared. However, there are some individuals or businesses that prey on unsuspecting taxpayers. Questionable return preparers may skim off their clients' refunds, charge inflated preparation fees, or by promising guaranteed or inflated refunds. It is important to choose carefully when hiring a tax preparer. Here are some ways to determine whether a preparer is likely a fraudulent preparer: (1) The preparer does not sign the return or place their Preparer Tax Identification Number ("PTIN") on the return. The IRS requires that all tax return preparers obtain a PTIN in order to prepare returns. So if this information is missing, you may be a victim of fraud. (2) The preparer does not give you a copy of your income tax return. If someone files a return on your behalf, you are entitled to a copy of the return. Any preparer who refuses to provide you with a copy of your income tax return is likely committing fraud. (3) The preparer promises that you will receive a larger refund than normal. No one can promise or guarantee you a large refund prior to preparing the actual return. If this occurs, it is likely going to be as a result of fraud. (4) The preparer charges a percentage of the refund or requires you to split the refund amount as the preparation fee. Most preparers will charge a flat fee for their service based on the type of income tax return prepared, or charge based on a fixed hourly rate. If a preparer requests to receive a percentage of your refund, you may be the victim of fraud. (5) The preparer adds forms to the return that you have never filed before. It is important that you analyze the return prior to signing the return or the consent form. If any of the forms looks suspicious, you are likely the victim of fraud. (6) The preparer encourages you to place false information on your return. Any preparer that encourages you to falsify information should not be trusted. Your willingness to comply or oversight of the falsified information will cause you to face dire consequences. It is important that you choose your tax preparer wisely in order to avoid becoming a victim of tax fraud.

Hiding Income Offshore
     Hiding Income Offshore is tax evasion. There are specific guidelines and reporting obligations that follow the maintenance of financial accounts abroad. The IRS has reopened the Offshore Voluntary Disclosure Program which allows taxpayers to pay a reduced penalty for non disclosed offshore accounts. In 2011, the IRS has collected $1 billion from up front payments from the 2011 program, and is expected to increase. 

"Free Money" From the IRS & Tax Scams Involving Social Security
          Fliers and Advertisements that promises "free money" from the IRS is a scam. There is no such thing as "free money," especially if you expect to receive it from the IRS. The scammers prey on low income and elderly individuals. Scams involving Social Security results from promises of Social Security refunds or rebates that do not exist. In some instances where a refund may actually be due, the scammer uses inflated information to complete the return. The penalty for such returns may be as high as $5,000. It is not worth it! Do not become a victim of the "free money" tax scam.

False/Inflated Income and Expenses
     This type of scam involves including income on the tax return that was never earned, or misclassifying income as either wages or self-employment. It also involves the act of claiming expenses that were never paid in order to reduce one's income or to qualify for credits such as the Earned Income Tax Credit or the Fuel Tax Credit. This type of fraud can result in a penalty of $5,000. Do not engage in acts that seek to falsify information.

False Form 1099 Refund Claims
     This type of scam involves the fradulent issuance of a Form 1099 Original Issue Discount (OID), tro justify a false refund claim on a corresponding income tax return. Some indivduals have made refund claims under the false assumption that the government maintains secret accounts for each individual and that taxpayers can gain access to these accounts by issuing 1099-OID forms to the IRS. Do not become deceived by notions that appear to good to be true. Never claim credits or deductions for you are not entitled, or that requires you to falsify information or documentation. This type of fraud may result in financial penalties as well as criminal prosecution.

Frivolous Arguments
     This type of tax scam involves the use of unreasonable claims in order to either avoid paying their taxes, or to obtain funds to which they are not legitimately entitled. The IRS has a list of frivolous tax arguments, and they have not been upheld in Tax Court. Do not rely on fictious arguments to disobey the law.

Falsely Claiming Zero Wages
     The typical zero wages scam involves the filing of a Substitute Form W-2 by filing a Form 4852. Through the use of this form, the taxpayer seek to reduce their taxable income to zero and may also submit a statement or statutory explanation refuting wages and taxes reported by a payer to the IRS. This type of fraud amy result in a $5,000 penalty. So do not seek to falsify your income, it is not worth it.

Abuse of Charitable Organizations and Deductions
     This type of fraud typically involves an attempt by donors to maintain control over assets or income that were allegedly donated to a 501(c)(3) organization. The donations may also be highly overvalued which results in a larger deduction for the donor. The Pension Protection Acto fo 2006 imposed increased penalties for inaccurate appraisals and sets new standards for qualified appraisals. haritable Organizations may also lose their exempt status for engaging in such acts.

Disguised Corporate Ownership
     This type of fraud involves the use of third parties in order to request employer identification numbers and form corporations that seek to hide the identity of the true owners. Common acts commited by this type of fraud involves underreported income, claiming of fictitious deductions, avoidance of filing tax returns, money laundering, and other financial crimes. The IRS is actively working with State Official in order to ensure compliance with the law.

Misuse of Trusts
     This type of scam involves the transer of assets into trust accounts that are highly questionable. Promoters may promise that the transaction will result in a reduction of taxable income, deductions for personal expenses, or a reduction in the estate or gift taxes. These type of scams may also be used to avoid paying income tax liability to the IRS or to hide assets from creditors. However, such trusts rarely deliver the tax benefits promised by the promoter. Taxpayers are encouraged to seek competent advice from trusted and qualified professionals prior to entering into a trust arrangement because the consequences may be more detrimental than the benefit they seek to derive from it.

Reference:

Internal Revenue Service, (2012). IRS Releases the Dirty Dozen Tax Scams for 2012. Retrieved on May 16, 2012 from: http://www.irs.gov/newsroom/article/0,,id=254383,00.html?portlet=107.

Highlights of Obama's State of the Union Address

President Obama is quite a speaker and I enjoyed his State of the Union Address. There are several topics that he discussed that sparked my interest and should be expounded upon. First, he discussed the Tax Code and made and appeal for reform. Second, he discussed Student Loans and what should be done about the expected increase of interest rates. Third, he discussed the creation of jobs in the United States. Lastly, he made an appeal to reform the various branches of government.

Reformation of the US Tax Code

     Many Americans if not all, believes that our Tax Codes are outdated, and are far too complex to even be comprehended. This notion is not far from the truth. The Tax Codes entails various loopholes and credits that seem to benefit one class over the other, and this was addressed by President Obama by using the example of Warren Buffet who pays less taxes than his secretary. His comments about taxing the rich has often been regarded as "class warfare," however, asking everyone to pay their fair share of taxes is not a "class warfare," it is "fair." In implementing the tax bracket system, our government was designed so that those who earned more, would pay more in taxes. It is not a system developed with a goal to prevent wealth, but a system that recognizes the principle of "to whom much is given, much is required," or in this case, to he who earns more, more will be required. As a Tax Attorney, I see the need to reform the Tax Codes, starting with eliminating the loopholes, and simplifying the system so that everyone pays taxes according to his earnings. Using Christianity as an example, God made it mandatory that everyone pays ten percent of his first fruits, or earnings. For the poor, ten percent will be less than that of the rich. In the end, they all pay their fair share based on their earnings. It is not class warfare to ask everyone to do this.

The issues that I see with reforming the Tax Codes is in the application of those codes. In negotiating with the Internal Revenue Service ("IRS") on behalf of my clients, I have discovered that there is a lack of uniformity in how the codes are applied, and the in the application of the Internal Revenue Manual ("IRM") which guides the operations of Revenue Officers and IRS personnel. I find that I spend a lot of time having to debate what the IRM says, and how it should be applied. Sometimes, even in showing individuals what the IRM says, I am informed that internally, their manager does not apply the law that way, or does things differently. If Revenue Officers lack uniformity in their application of the Tax Codes, we cannot expect that reforming these codes would make things easier. Not only would the Tax Codes require reformation, but the individuals charged with enforcing those codes would all need to be trained to apply the law universally throughout the various locations. The system of checks and balances within the IRS needs to be reformed.

Student Loans

The President discussed that the interest rates on student loans were expected to increase. If increased to a higher interest rate, we can expect that there will be less Americans going to college, and more default in payments. The government should seek ways to minimize the debt of Americans seeking to earn a college degree in order to obtain better paying jobs, and in order to obtain those jobs that he claims are on demand. I was impressed by the idea that companies would pay for the education of Americans for an area of study that is on demand within the company, so that the position can be filled by an American. This idea has merit. However, we cannot expect private companies to all do this, when there are foreigners competing for these positions who already possess the degree and skills required for those positions. The problem is that obtaining a degree in engineering or various science degrees are often the most expensive here in the United States. If Americans are expected to compete with foreigners for these positions, both the federal and state government needs to find ways to make education less costly for Americans. I would like to see a statute of limitations on the number of years the Federal Government has to collect student loan debt once the individual graduates from college, similar to the IRS Collection Statute Expiration Date of ten years, where if the debt is not collected, it is extinguished. This would help a lot of students who are currently in debt with the hopes of finding gainful employment that they either do not qualify for, or just does not exist.

Creation of Jobs in the United States

The President presented a valid point that we should not allow tax breaks for companies who take the jobs overseas. That this is even a possibility is absurd. This should be a wake up call to the government that its payroll taxes are so extreme that even American Companies refuse to hire Americans. I am sure that they would love to keep the jobs within this country, however, the high payroll taxes makes it an unfavorable option. Not only do employers have to comply with Federal payroll taxes, but some states also require payroll taxes. This is double taxation, and it needs to be revised, otherwise, we cannot expect to see an increase in job availability. We would expect to see continuity in companies relocating overseas. It is time the government start looking at China and figure out what it is that they are offering to companies in that country that we are not offering. Then maybe we can begin to reform our system in such a way that it attracts foreign companies to transfer to our country.

Reformation of the Branches of Government

How Should the IRS Fix Its Problem of Giving Out Erroneous Refunds?

As our economy worsens, individuals are becoming more and more creative in ways to cheat the IRS system in order to obtain large, yet fraudulent refunds. It is interesting that although the IRS is aware that this problem exists, it has yet to find a way to prevent the issuance of these fraudulent refunds, and instead has to take measures yearly in order to regain the funds that it had issued on these fraudulent tax returns.

Here are some examples:

In September, CNN reported that, a Los Angeles woman pleaded guilty to filing tax deductions for at least 20 fictitious children, which she claimed were all born on the exact same day, in order to land a $300,000 refund. Now I have heard of "Octo Mom" but 20 children is an obvious fiction. So why was this error not caught from the beginning. Why issue such a lavish refund first, then try to obtain the funds later? By then all of the funds will be disbursed, and it will be too late.

It has also been reported by the IRS, that one of the more popular tax scams is one in which individuals are convincing taxpayers that they will obtain a large refund if they follow the instructions of these unnamed individuals. First, these unnamed individuals will provide the taxpayers with the income documents needed in order to exaggerate their income, such as W-2s, 1099s, etc. Second, The individual will then use these forms to have their income tax prepared by a tax preparer that they will recommend. Lastly, the taxpayers must agree to donate some of the funds to charity or to humanitarian efforts, such as giving money to anyone less fortunate. What these taxpayers fail to realize, is that employers are required to report the W-2s, 1099s, and other income reporting documents to the IRS and/or Social Security Administration. As a result, if the income documents are fictitious, it won't be long before the IRS is notified.

The problem with our current system is that it realizes the fraud after the refund had already been issued. According to CNN, the IRS reported that its fraud investigations jumped 14% year over year to 4,706 in fiscal 2010. Meanwhile, cases that the IRS believes should be brought to court and prosecuted climbed 18% and convictions rose 4%. My suggestion would be to not issue tax refunds until after the allotted time when the IRS expects to receive all income documents from the employers, financial institutions, or other companies required to report to the IRS. The issuance of refunds should be postponed until after April 15th which is the IRS filing deadline for all income tax returns. This would give the IRS sufficient time to flag any suspicious returns prior to paying out the funds. The IRS may also automatically review all returns claiming a refund in excess of a given number that should be determined from the average return that were found to be fraudulent. There is just no justification for paying an individual $300,000 in refunds, and then ask for the money back. The chances of getting that money back is slim to none.

It makes you wonder how much of our current deficit may be due to erroneous refunds issued by the IRS doesn't it?

Reference:
http://money.cnn.com/2011/09/07/pf/tax_fraud/index.htm?iid=SF_PF_LN

Should a Non-Profit Organization be Sanctioned by the IRS for Donating to a Presidential Campaign?

A very hot and well debated topic is the allegation that Republican Candidate Herman Cain has received Forty Thousand Dollars in donation from a non-profit organization. It is also alleged that these funds were used to pay for chartered flights and Ipads. Activists are requesting that the Internal Revenue Service step in and sanction any non-profit organization or deny them of their exempt status for donating to a presidential campaign. The question becomes what powers does the IRS have under these circumstances, and should such measures be taken?

Under the Internal Revenue Code (IRC), "all section 501(c)(3) organizations are absolutely prohibited from directly or indirectly participating in, or intervening in, any political campaign on behalf of (or in opposition to) any candidate for elective public office." As a result, contributions made to political campaign funds or public statements of position (verbal or written) made on behalf of the organization in favor of or in opposition to any candidate for public office clearly violate the prohibition against political campaign activity. The IRC holds that violating this prohibition may result in denial or revocation of tax-exempt status and the imposition of certain excise taxes.

However, some political activities or expenditures may not be prohibited depending on the facts and circumstances. For example, voter education activities, including presenting public forums and publishing voter education guides, conducted in a non-partisan manner do not constitute prohibited political campaign activity. In addition, other activities intended to encourage people to participate in the electoral process, such as voter registration and get-out-the-vote drives, would not be prohibited political campaign activity if conducted in a non-partisan manner.

On the other hand, voter education or registration activities with evidence of bias that (a) would favor one candidate over another; (b) oppose a candidate in some manner; or (c) have the effect of favoring a candidate or group of candidates, would constitute prohibited participation or intervention.

As a result, it appears that the IRS does have the power to sanction these charitable organizations and also has the ability to strip them of their non-exempt status. Any non-profit organization that receives donations from others should not donate such funds to political campaigns. Rather, the funds should be used for the benefit and well being of society. The belief that a certain candidate can better the economy for the benefit and well being of others is insufficient, and is more like a game of Russian Roulette that is not worth undertaking. The IRS would be well in its right to step in and sanction these organizations.

What do you think, do you believe that the IRS should step in and discipline these non-profit organizations?

Reference: http://www.irs.gov/charities/charitable/article/0,,id=163395,00.html